A Tale of Two Earnings Seasons

The division between the haves and have-nots in the markets is more acute than ever... some sectors can ignore inflation and other disruptive news while other sectors are hit extra hard, writes MoneyShow.com Senior Editor Igor Greenwald.

We have a nuclear plant leaking plutonium on the devastated coast of Japan. There’s a shooting war in Libya involving US planes, where 2% of global oil output has been shut off until further notice. Gasoline is pushing $4 a gallon as Arab revolutions haunt the obsolete, soft, and clearly rattled Saudi monarchy.

And the market couldn’t care less.

It’s doing a rain dance ahead of the quarterly downpour of pennies per share, fully expecting the richest bounty since the summer of 2007. Companies included in the S&P 500 index are expected to earn a bit more than $22 a share on an operating basis, up 14% on a year ago.

The gravy’s looking very lumpy, however, with the energy sector expected to extract nearly half of the S&P’s entire earnings haul. In contrast, the consumer discretionary group will be lucky to bag the expected 5% annual gain, while telecoms and utilities may post slight drops.

Earnings seasons have been good to shareholders for the last two years. Over that span, the months associated with the crush of corporate results—January, April, July and October—have seen the S&P 500 rise an average of 3.2%, or more than 50% faster than it did the rest of the time.

The 9.4% jump in April 2009 certainly helped, as did the 7.4% spurt three months later. But stocks also rallied 6.9% last July and 3.7% in October 2010.

Princes and Paupers
But there’s a trend afoot that seems a better bet than hopes that profits will beat not just analysts’ forecasts but shareholders’ possibly loftier expectations. Like the US economy and the world, this market’s in the process of dividing into the haves and the have-not-quite-enoughs.

In addition to commodity suppliers, the richer group includes emerging-markets exporters and other suppliers to corporations, the larger the better. That’s where the growth and the money reside.

According to Bloomberg, companies sitting on $940 billion in cash are planning to boost investment in plants and equipment by a record 22% this year. With S&P 500 sales expected to grow 14%, such spending figures to earn better returns than cash, if it earns anything at all.

In contrast, companies catering to US consumers are stuck with much more cautious and budget-minded customers. And it’s not all about the $4 gas.

For example, personal income rose 0.3% last month in nominal terms, but actually slipped 0.1% after taxes and inflation took their toll. Personal spending, up 0.7% nominally, was just 0.3% higher factoring out inflation.

Looking at statistics from several prior months, John Mauldin makes a convincing case that the consumer is getting squeezed as incomes fail to keep up with prices.

Irrational Apathy
This is the market’s Achilles heel, and it’s reflected in the way investors have responded to cautious commentary in recent days from several key consumer companies.

On Wednesday, Best Buy (BBY) beat the consensus earnings estimate, but still posted an earnings drop on weaker sales. Domestic same-store sales were down a heftier-than-expected 5.5%—and while some of that could be laid to last year’s strong PC sales, the fact is that consumers are not buying expensive new TVs the way they used to.

And by the time executives on the conference call warned not to expect any uptick in demand until the second half of the year, what had been a 5% pre-market gain turned into 5% setback for the shares.

The next day, Darden (DRI), the owner of Red Lobster and Olive Garden eateries, also topped estimates and even nudged its annual guidance above forecasts. But the stock tanked 5%, after the CEO said on the conference call that “the environment, while improving, remains more fragile than normal, and it's very much driven by promotional effectiveness.”

Then yesterday, Marriott (MAR) had the temerity to trim its revenue forecast, because while overseas growth is humming along at 11%, North American rooms are ringing up a gain of 5% to 6%, instead of the previously forecast 6% to 8%. Marriott is running into resistance against its increased East Coast rates.

The stock slid 6% and took the entire sector down.

There were no such reservations Friday for management-consulting and technology-services giant Accenture (ACN), after it said annual sales could exceed current estimates by up to 17%. Earnings jumped 26%, and the CEO and CFO used the word “strong” 17 times in the space of a few minutes on the conference call, along with “outstanding,” “exceptional,” and “momentum.”

The same day, Oracle (ORCL) said pretty much the same thing, because its customers are similarly flush, and similarly uninhibited by a 10% increase in gas prices.

Where to Invest...And Not to Invest
How the market deals with this divide should be one of April’s most telling story lines. I would bet on the stocks of companies posting strong sales gains and good recent price momentum, especially those who don’t have to sweat a failure of nerve by US consumers.

That would include Apple (AAPL), which does not compete on price. It's growing revenue 70%, and is up 9% so far this year. Heavy equipment maker Caterpillar (CAT) is posting sales growth of 62% and is up 17% in 2011. Foreign sales account for two-thirds of the company’s revenue.

Chip equipment manufacturer Applied Materials (AMAT) is seeing revenue growth of 45% and a gain in its stock price of 10% so far this year. North America accounts for just 23% of sales.

Who’s vulnerable? Urban Outfitters (URBN), Nike (NKE), Carnival (CCL), Marriott and the Sheraton and Westin operator Starwood (HOT) are all among the 20 worst-performing S&P 500 stocks over the last month, and all are down significantly year-to-date as well.

If any of these pop Friday on a positive surprise to the job numbers, that might be another chance to sell.